Question

42. Assume the required reserve ratio is 20 percent and the FOMC orders an open-market purchase of $100 million in government securities from member banks. If the oversimplified money multiplier is assumed, then the money supply will

	a.	decrease by $100 million.
	b.	increase by $100 million.
	c.	decrease by $500 million.
	d.	increase by $500 million.

43. In the mid-1990s, real interest rates fell in the United States. This was the result of budget deficit

	a.	reductions and tighter monetary policy.
	b.	increases and tighter monetary policy.
	c.	increases and looser monetary policy.
	d.	reductions and looser monetary policy.

48. An expansionary monetary policy will

	a.	increase a current account deficit.
	b.	increase imports.
	c.	decrease exports.
	d.	decrease a capital account surplus.

49. The Fed has which of the following as its strongest control over the money supply?

	a.	Open-market operations
	b.	The discount rate
	c.	Interest rate changes
	d.	The required reserve rate

Answer 1

42. The correct answer is option (d) increase by $500 million.

Money Multiplier = 1/ reserve ratio

So money Multiplier = 1/0.20 = 5

∆ Money supply = ∆ Reserve × Money Multiplier

∆ money supply = 100 × 5 = $ 500 million

43 the correct answer is d) reduction and looser monetary policy.

Because an decrease in real rate of interest will decrease in future budget deficit increase domestic investment and increase future level of output.

48. No answer is correct in this question

Because monetary expansionary policy causes lowers the value of currency which means devalution. So it causes decrease in import and increase in export, capital account surplus means export is more than import, hence it causes increase in capital account surplus because export increase as devalution of money. Similar for decrease in current account deficit.

49 the correct answer is a) open market operations.

Because fed buy and sell securities to control money supply. This activity called open market operation.